EM investors line-up for Mexico’s tequila sunrise

Mexico has become a firm favourite among EM investors in recent years. Strong gains in commodities and close proximity to a recovering US market have helped underpin this positive image.

However, the oil price plunge at the end of 2014 has raised concerns about the economy’s investment story. So how are the country’s longer-term prospects bearing the strain? We canvassed top managers to find out whether they are breaking for the border or staying put.

Peso Power

The Mexican currency has come under pressure in recent months thanks to an increasingly strong US dollar. However, Mary-Thérèse Barton, who co-runs the Pictet-Latin American Currency Debt fund, believes this is likely to be a short-term setback before a stronger recovery in the country’s currency takes hold.

‘It’s too early to give Mexico a clean bill of health in the short term. Over the next few months, the front end of the bond market is likely to remain volatile given its sensitivity to changes in US interest rate expectations.

‘We expect the yield differential between the short end and long end of the bond market to narrow. The Mexican peso is likely to remain under pressure in the face of broad US dollar strength, at least over the near term.

‘However, it is a currency we find attractive and we will be looking to increase our exposure as soon as we see signs of a stabilisation in emerging economies.’

Staying the distance

Luc D’Hooge, head of emerging market bonds at Vontobel, is slightly more cautious than his peers, and is concerned the oil price slide may cool investor sentiment towards the market. However, he believes the longer-term story remains intact and that’s where he’s focused.

‘We invested in long-dated Mexican paper such as Mexico 2110 and 2114. We believe Mexican bonds sold off excessively on concerns about the reduction of oil-related revenues. These revenues are certainly important for the government budget but after years of falling production, Mexico has become a net importer of energy.

‘Investing in Mexican bonds is also a suitable way of benefiting from the pick-up in US economic growth, as the Mexican economy is strongly geared to that market,’ D’Hooge says.

‘From a credit perspective, my view is really that the correction in government bond spreads has reflected short-term risks related to lower oil prices and the accompanying association with fiscal revenues,’ he says.

‘Mexico’s oil reforms, if executed successfully, will provide a longer-term catalyst for economic growth. Its proactive approach to fiscal discipline in recent months has also been encouraging.

‘Given the credit has historically traded relatively tight to global peers, the current discount looks more attractive. In the past the relative richness of debt in Mexico and Mexican corporates has excluded it from our portfolios, but we now see selective opportunities.’

Ratings on the rise

Part of the enthusiasm for Mexico stems from the strength of the corporate sector. Scott Mather, CIO for US core strategies at PIMCO, believes this area of the country’s economy looks far more attractive than many of its developing world peers.

‘Mexico’s steadily improving fundamentals have led to a stream of credit rating upgrades – including a bump up to A3 by Moody’s last year,’ Mather says.

‘And if you compare the local rate curve with other investment grade options in emerging markets, let alone those in developed market economies, the relative value of investment grade Mexican bonds looks compelling.

‘What’s more, this story is likely to have legs: Mexican yields are less repressed than those in the US and Mexico’s central bank is expected to lag the Federal Reserve in a tightening cycle, both in magnitude and timing.’

This article originally appeared in the June edition of Citywire Global magazine.

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